Regulating Deferred Incentive Pay
49 Pages Posted: 2 Jun 2014
There are 2 versions of this paper
The Economics of Deferral and Clawback Requirements: An Indirect Tax Approach to Compensation Regulation
Date Written: March 2014
Abstract
Our paper examines the effect of recent regulatory proposals mandating the deferral of bonus payments and claw-back clauses for compensation contracts in the financial sector. We study a multi-task setting in which a bank employee, the agent, privately chooses (deal or customer) acquisition effort and diligence, which stochastically reduces the occurrence of negative events over time (such as loan defaults or customer cancellations). The key ingredient of the compensation contract is the endogenous timing of a long-term bonus that trades off the cost and benefit of delay resulting from agent impatience and the informational gain, respectively. Our main finding is that government interference with this privately optimal choice may
Keywords: Compensation design, Financial regulation, Principal-agent models
JEL Classification: D86, G21, G28
Suggested Citation: Suggested Citation